When Buchanan Partners of Gaithersburg found itself with a large warehouse sitting empty in Loudoun County two years ago, it decided to try something different.
Instead of seeking industrial tenants to lease the building, it converted the space to offices and sold the 105,000 square feet in chunks to carpet installers, heating and air-conditioning repair companies and others in service businesses, much like a real estate agent would sell a condo. The building was quickly sold out, said Brian S. Benninghoff, a principal at Buchanan.
Since then the developer has built 200,000 more square feet -- the equivalent of almost two city blocks -- of office condos and commercial condos, as they are called, in the Northern Virginia suburbs. It has sold most of the space.
"The demand for space to lease dried up, so we turned to selling it," Benninghoff said. This summer Buchanan plans to build three more office condo buildings along the Dulles corridor. It has already pre-sold 20 percent of the space.
The idea of buying your own office has been around for decades, usually with professionals like orthodontists and accountants buying a residence and converting it to a business. But in the past few years all sorts of small firms have bought space in bigger buildings, from the suburbs to downtown. The office condos range in size from 1,500 square feet to 50,000 square feet.
It is happening in New York, Atlanta, Dallas, Southern California and Northern Virginia, places where developers built too many buildings for technology companies that went bust after 2000. The collapse coincided with historically low interest rates that made buying more affordable. Office condos make up a small percentage of developments in the Washington area, making them difficult to track precisely.
"In places where there was overbuilding, developers are finding that they can convert their buildings into office condos and sell the space instead of dealing with a market where it can be hard to lease the space," said David Porter, a regional director at Co-Star Group, a real estate research company in Bethesda.
The customers include law firms, insurance agents, title firms, nonprofit groups and financial planners, as well as plumbers and repair companies. Buying confers several advantages, say the developers: Owning gives buyers more control over the space. A mortgage can be cheaper than rent. Also, of course, buying gives owners a long-term investment they can sell later and tax advantages.
Other developers are starting to take notice, even in downtown Washington, where the office market has been stronger than in the suburbs. One of the District's biggest developers, Akridge, tore down two buildings and plans to build an office condo building of 74,000 square feet at 1430 K Street NW, said Gene Kenney, a vice president at the company. Another big developer, JBG Cos. of Chevy Chase, said it plans to tear down a small building, once a shoe repair shop with a parking garage above it, near 16th and L streets NW to build a nine-story office condo project.
It's a far cry from the old days, when only a few doctors and other professionals owned their offices. "If you wanted to own a small office, you really had to be in a townhouse in Dupont Circle or out in Alexandria," said Jayne Shister, a senior vice president at the brokerage firm Cassidy and Pinkard who represents JBG. "There just wasn't many around."
JBG wants to build an office condo on L Street, Shister said, instead of a traditional office building because few developers are building office condos in the District and the market is less crowded with product. None of the condos has been pre-sold, but Shister said she has had inquiries from several nonprofit groups and two unions. Construction starts in the fall and the building is expected to be finished in December 2005.
Office condos have disadvantages for developers and tenants, too. If interest rates rise, it might price some buyers out of the market, taking the steam out of the business, said David B. Gast, a first vice president at CB Richard Ellis in Tysons Corner.
Tenants who outgrow their space may have trouble finding more next door. And if they cannot, it will not be easy to just pick up and move.
"It can cut down on a company's flexibility," said David Loeb, an analyst at Friedman, Billings, Ramsey Group. "Buying your office space is risky because it assumes you're going to be in business and occupying that space for the long term."
John Forrest, owner of New Dawn Distributing LLC, which sells soaps, brushes and equipment to car washes, said he stopped paying $2,000 a month in rent and bought a $385,000 space in a small warehouse in Herndon. His mortgage payments are about $2,500, but because he's locked in a low interest rate for 20 years, he said he will save money over the long term as rents rise.
"Owning it is a way of building some long-term equity, as opposed to making our landlord a little wealthier," Forrest said. "If our business doesn't continue, we could lease it or sell it."
Pressing for a New Hotel
A big professional association says it might not show up for a major convention in 2009 unless Washington gets another big hotel near the convention center.
The American Academy of Orthopaedic Surgeons is expected to bring 28,000 surgeons and other health professionals to the convention center at Mount Vernon Square in February 2005, then is expected to return in 2009. But the organizers say they worry that without a large new hotel next to the convention center, they will not be able to accommodate the 30,000 attendees for the second meeting, said Susan McSorley, director of convention and meeting services for the group.
Mayor Anthony A. Williams (D) and the D.C. administration are planning to build a big hotel next to the convention center to open around 2008. But in April local architect Ted Mariani proposed putting a hotel on the nearby site of the old convention center instead. The administration opposes that plan, but some council members say they want to consider it. While people on both sides confer, the administration said it expects to present to the D.C. Council by the end of the month a plan for financing its hotel.
McSorley, meanwhile, said the orthopedic group is to decide in a month or two whether to come to Washington in 2009.
Dana Hedgpeth's e-mail address is firstname.lastname@example.org.